Knapp v. Hoey

Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before L. HAND, SWAN, and AUGUSTUS N HAND, Circuit Judges.

AGUSUTUS N. HAND, Circuit Judge.

The plaintiff sued the Collector to recover overpayments of income taxes for the years 1931 and 1932 and set up separate causes of action for each year. The defendant moved to dismiss the complaint as insufficient on its face, and Judge Paterson denied the motion. Thereafter, upon failure of the collector to answer and notice on his part that he elected to stand on his motion to dismiss, judgment was entered in favor of the plaintiff for the amount of taxes alleged to have been overpaid with interest and costs. The collector thereafter appealed from the judgment which we regard as right and order affirmed.

On April 2, 1929, the plaintiff executed a deed of trust whereby he transferred to himself and another as trustees 17,400 shares of the stock of Printing Securities Corporation and provided that the trustees were to hold the corpus of the trust, to collect the income therefrom and to pay it to such persons and in such proportions or amounts as were set forth in the "Schedule of Income Distribution" during the life of the settlor. Upon the death of the latter the trustees were to pay over the principal to such persons and in such proportions or amounts as should be set forth in a "Schedule of Disposition of Principal upon Termination of Trust". The second article of the instrument provided that the settlor might from time to time "modify or alter this indenture and the schedules forming part hereof and the trusts then existing and the estates and interests in the property hereby created but in the following particulars only". These particulars were such as to allow the sellor to increase the principal of the trust, to remove his co-trustee and appoint a substitute and to amend the trust by:

"(B) Disposing of the income of the trust estate as originally constituted, or as it may exist from time to time, otherwise than as originally provided in this Indenture by the said 'Schedule of Incoem Distribution' by altering the proportion or amount of income to be paid to or applied to the use of any one or more of the beneficiaries, by canceling any benefaction to any one or more of the beneficiaries, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of beneficiaries, by providing for the proportion or amount of income to be paid or applied to the use of such additional or substituted beneficiaries; provided, however, that in no event shall any such modification or alteration direct that the said income be paid to or applied to the use or benefit of the party of the first part;

"(C) Directing the distribution of the principal of the trust estate, as the same shall be constituted at the termination of the trust, otherwise than as originally provided in this indenture by the said 'Schedule of Disposition of Principal upon Termination of Trust', by altering the proportion or amount of the principal of said trust estate to be assigned, paid and set over to any one or more of the beneficiaries mentioned in said Schedule, by canceling any benefaction to any one or more of said beneficiaries, by substituting any beneficiary or beneficiaries in the place of any one or more of them, by adding to the number of said beneficiaries, by providing for the proportion or amount of the principal of the trust estate to be assigned, paid and set over to such additional or substituted beneficiary, or for the manner in which all or any part of said principal shall be divided or distributed upon the death of the said Joseph P. Knapp."

Between April 2, 1929, and the end of the taxable year 1932 the settlor modified and altered the trust on several occasions by changing the schedules of distribution of the income and the principal. On none of these occasions, however, was any portion of the income of the trust directed to be paid to the settlor, nor was any portion of the principal of the trust directed to be paid to his estate. Moreover, in each instance the schedules of income and principal distribution provided for the distribution of the entire income of the trust and the entire principal thereof. During the years 1931 and 1932 no part of the trust income was paid to the settlor directly or indirectly, nor was he entitled to receive any part of the same.

The sole issue involved on this appeal is whether or not the income of the trust created by the plaintiff was taxable to him for the year 1931 under Section 166 of the Revenue Act of 1928, 26 U.S.C.A. § 166 note, and for the year 1932 under Section 166 of the Revenue Act of 1932, 47 Stat. 221, 26 U.S.C.A. § 166.

The foregoing sections read as follows:

Act of 1928.

"Sec. 166. Revocable Trusts.

"Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such ...

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